Discounted cash-flow analysis

Because businesses are concerned with making money, it makes sense that they would want to know what the future financial return will be worth. Determining discounted cash flow involves three very specific variables that help to determine the present value of today's money (in today's market) and apply that to a potential future return on investment:

• The first thing that is necessary is to determine the payback period or the time that is projected to take to recover the initial investment.
• Then, the analysis will focus on determining what's going on in the market and figure out the applicable discount rates, which are typically the current interest rates. Some consideration for inflation could be involved as well.
• The third consideration is the assumed amount of money the organization will recover in the future.

Even though the discounted cash-flow analysis could be considered a subjective analysis, it actually is more objective because we are looking at the assumed payback period as well as the present value of today's money and potential return on investment in the future. Remember, some projects are chartered because of a customer request so the analysis could be based on promised returns that have already been discussed, hence making the analysis more predictable.